UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2004
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission File Number: 000-28600
CCC INFORMATION SERVICES GROUP INC.
(Exact name of registrant as specified in its charter)
DELAWARE 54-1242469
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
WORLD TRADE CENTER CHICAGO
444 MERCHANDISE MART
CHICAGO, ILLINOIS 60654
(Address of principal executive offices, including zip code)
(312) 222-4636
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No __
-
Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes X No __
As of October 29, 2004, 15,896,774 shares of CCC Information Services Group
Inc. common stock, par value $0.10 per share, were outstanding.
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION PAGE
Item 1. Financial Statements (Unaudited)
Consolidated Interim Statements of Operations. . . . . . . . . . . 1
Consolidated Interim Balance Sheets. . . . . . . . . . . . . . . . 2
Consolidated Interim Statements of Cash Flows. . . . . . . . . . . 3
Notes to Consolidated Interim Financial Statements . . . . . . . . 4
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations. . . . . . . . . . . . . . . . . . . . . . . 14
Item 3. Quantitative and Qualitative Disclosures About Market Risk . . . . 25
Item 4. Controls and Procedures. . . . . . . . . . . . . . . . . . . . . . 25
PART II. OTHER INFORMATION
Item 1. Legal Proceedings. . . . . . . . . . . . . . . . . . . . . . . . . 26
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 26
Item 3. Defaults Upon Senior Securities. . . . . . . . . . . . . . . . . . 27
Item 4. Submission of Matters to a Vote of Security Holders. . . . . . . . 27
Item 5. Other Information. . . . . . . . . . . . . . . . . . . . . . . . . 27
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . . . 27
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
EXHIBIT INDEX. . . . . . . . . . . . . . . . . . . . . . . . . . . 30
CCC INFORMATION SERVICES GROUP INC.
AND SUBSIDIARIES
CONSOLIDATED INTERIM STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------------------------
2004 2003 2004 2003
-------------------------------------
Revenues. . . . . . . . . . . . . . . . . . . . . $49,092 $48,621 $148,168 $144,450
Expenses:
Production and customer support. . . . . . . . . 7,976 8,279 24,132 23,377
Commissions, royalties and licenses. . . . . . . 3,166 3,184 9,485 8,614
Selling, general and administrative. . . . . . . 17,086 16,699 54,120 52,415
Depreciation and amortization. . . . . . . . . . 1,719 1,944 5,628 5,888
Product development and programming. . . . . . . 7,175 7,838 23,302 23,690
Stock compensation expense non-cash. . . . . . . 13,139 - 13,139 -
Restructuring charges. . . . . . . . . . . . . . - - 886 1,061
Litigation Settlement. . . . . . . . . . . . . . (2,586) - (2,586) -
---------------------------------------
Total operating expenses. . . . . . . . . . . . . 47,675 37,944 128,106 115,045
Operating income. . . . . . . . . . . . . . . . . 1,417 10,677 20,062 29,405
Interest expense. . . . . . . . . . . . . . . . . (1,199) (169) (1,471) (556)
Other income, net . . . . . . . . . . . . . . . . 265 45 432 201
Equity in income (loss) of ChoiceParts investment 161 (150) 365 (144)
---------------------------------------
Income before income taxes. . . . . . . . . . . . 644 10,403 19,388 28,906
Income tax provision. . . . . . . . . . . . . . . (161) (4,052) (7,356) (11,090)
---------------------------------------
Net income. . . . . . . . . . . . . . . . . . . . $ 483 $ 6,351 $ 12,032 $ 17,816
=======================================
PER SHARE DATA:
Income per common share:
Basic. . . . . . . . . . . . . . . . . . . . . . $ 0.02 $ 0.24 $ 0.47 $ 0.68
=======================================
Diluted. . . . . . . . . . . . . . . . . . . . . $ 0.02 $ 0.23 $ 0.45 $ 0.65
=======================================
Weighted average shares outstanding:
Basic. . . . . . . . . . . . . . . . . . . . . . 22,965 26,256 25,351 26,210
Diluted. . . . . . . . . . . . . . . . . . . . . 24,161 27,484 26,629 27,621
The accompanying notes are an integral part of these consolidated financial
statements.
CCC INFORMATION SERVICES GROUP INC.
AND SUBSIDIARIES
CONSOLIDATED INTERIM BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
SEPTEMBER 30, DECEMBER 31,
2004 2003
------------------------------
ASSETS
Cash and cash equivalents. . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 11,427 $ 20,755
Short-term investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - 7,004
Accounts receivable (net of allowances of $2,425 and $2,943 at September 30,
2004 and December 31, 2003, respectively) . . . . . . . . . . . . . . . . . . 13,872 10,247
Other current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,879 8,369
------------------------------
Total current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33,178 46,375
Property and equipment (net of accumulated depreciation of $38,471 and
$36,211 at September 30, 2004 and December 31, 2003, respectively). . . . . . 11,845 12,776
Intangible assets (net of accumulated amortization of $1,355 and $713 at
September 30,2004 and December 31, 2003, respectively). . . . . . . . . . . . 1,512 2,153
Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15,747 15,747
Deferred income taxes (net of valuation allowance of $11,599). . . . . . . . . . 12,952 9,127
Investments. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 630 265
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,814 292
------------------------------
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 79,678 $ 86,735
==============================
LIABILITIES AND STOCKHOLDERS' (DEFICIT) EQUITY
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 9,061 $ 5,937
Accrued expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18,602 16,522
Income taxes payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,653 1,602
Current portion of long-term debt. . . . . . . . . . . . . . . . . . . . . . . . 1,775 -
Deferred revenues. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,255 7,930
Other current liabilities. . . . . . . . . . . . . . . . . . . . . . . . . . . . 370 97
------------------------------
Total current liabilities. . . . . . . . . . . . . . . . . . . . . . . . . . . . 40,716 32,088
Long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 168,281 -
Other liabilities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,000 3,064
------------------------------
Total liabilities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 210,997 35,152
------------------------------
Commitments and contingencies
Preferred stock ($1.00 par value, 100 shares authorized, issued and outstanding) - -
Common stock ($0.10 par value, 40,000,000 shares authorized, 15,879,528 and
26,376,839 shares outstanding at September 30, 2004 and December 31, 2003,
respectively) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,588 3,034
Additional paid-in capital . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,201 131,590
Accumulated deficit. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (84,856) (36,838)
Treasury stock, at cost (4,460,501 and 4,094,665 common shares in treasury
at September 30, 2004 and December 31, 2003, respectively). . . . . . . . . . . (52,252) (46,203)
------------------------------
Total stockholders' (deficit) equity . . . . . . . . . . . . . . . . . . . . . . (131,319) 51,583
------------------------------
Total liabilities and stockholders' (deficit) equity . . . . . . . . . . . . . . $ 79,678 $ 86,735
==============================
The accompanying notes are an integral part of these consolidated financial
statements.
CCC INFORMATION SERVICES GROUP INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
NINE MONTHS ENDED
SEPTEMBER 30,
2004 2003
---------------------
Operating Activities:
Net income. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 12,032 $ 17,816
Adjustments to reconcile net income to net cash provided by operating activities:
Restructuring charges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 886 1,061
Equity in net (income) losses of ChoiceParts. . . . . . . . . . . . . . . . . . (365) 144
Depreciation and amortization of property and equipment . . . . . . . . . . . . 4,986 5,388
Amortization of intangible assets . . . . . . . . . . . . . . . . . . . . . . . 642 500
Deferred income tax provision . . . . . . . . . . . . . . . . . . . . . . . . . (3,825) 585
Compensation expense related to issuance of restricted stock. . . . . . . . . . 22 5
Stock compensation expense non-cash . . . . . . . . . . . . . . . . . . . . . . 13,139 -
Income tax benefit related to exercise of options . . . . . . . . . . . . . . . 827 306
Other, net. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 84 80
Changes in:
Accounts receivable, net. . . . . . . . . . . . . . . . . . . . . . . . . . . . (3,625) (658)
Other current assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 490 (128)
Other assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28 (58)
Accounts payable. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,124 (593)
Accrued expenses. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,210 (5,511)
Income taxes payable. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,051 1,046
Deferred revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (675) 934
Other current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . 432 (62)
Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1,064) (949)
--------------------
Net cash provided by operating activities . . . . . . . . . . . . . . . . . . . . . 30,399 19,906
--------------------
Investing Activities:
Capital expenditures. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (4,085) (4,828)
Purchase of short-term investments. . . . . . . . . . . . . . . . . . . . . . . - (7,008)
Proceeds from sale of short-term investments. . . . . . . . . . . . . . . . . . 7,004 -
Acquisition of Comp-Est, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . - (13,205)
--------------------
Net cash provided by (used for) investing activities. . . . . . . . . . . . . . . . 2,919 (25,041)
--------------------
Financing Activities:
Proceeds from borrowings on long-term debt. . . . . . . . . . . . . . . . . . . 177,500 -
Principal repayments on long-term debt. . . . . . . . . . . . . . . . . . . . . (7,444) -
Self-tender offer of common stock . . . . . . . . . . . . . . . . . . . . . . . (210,000) -
Payments of self-tender offer costs . . . . . . . . . . . . . . . . . . . . . . (935) -
Payment of debt issuance costs. . . . . . . . . . . . . . . . . . . . . . . . . (3,550) -
Proceeds from exercise of stock options . . . . . . . . . . . . . . . . . . . . 3,035 1,185
Payment of withholding tax related to exercise of stock options . . . . . . . . (1,415) -
Proceeds from employee stock purchase plan. . . . . . . . . . . . . . . . . . . 321 294
Payment of principal and interest on notes receivable from officer. . . . . . . - 1,506
Principal repayments of capital lease obligations . . . . . . . . . . . . . . . (158) (359)
--------------------
Net cash (used for) provided by financing activities. . . . . . . . . . . . . . . . (42,646) 2,626
--------------------
Net decrease in cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . (9,328) (2,509)
Cash and cash equivalents:
Beginning of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20,755 20,200
--------------------
End of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 11,427 $ 17,691
====================
Supplemental Disclosure:
Cash paid:
Interest. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,057 176
Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,862 9,096
The accompanying notes are an integral part of these consolidated financial
statements.
CCC INFORMATION SERVICES GROUP INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1- DESCRIPTION OF BUSINESS AND ORGANIZATION
CCC Information Services Group Inc. ("CCCG"), incorporated in Delaware in
1983 and headquartered in Chicago, Illinois, is a holding company, which
operates through its wholly owned subsidiary, CCC Information Services Inc.
("CCC"). CCC and CCCG are collectively referred to herein as the "Company" or
"we." We employed 758 full-time employees at September 30, 2004, compared to 872
at this time in 2003. We automate the process of evaluating and settling
automobile claims, which allows our customers to integrate estimate information,
labor time and cost, recycled parts and various other calculations derived from
our extensive databases, electronic images, documents and related information
into organized electronic workfiles. We develop, market and supply a variety of
automobile claim products and services which enable customers in the automobile
claims industry, including automobile insurance companies, collision repair
facilities, independent appraisers and automobile dealers, to manage the
automobile claim and vehicle restoration process. Our principal products and
services are CCC Pathways collision estimating software ("CCC Pathways"), which
provides our customers with access to various automobile information databases
and claims management software, and CCC Valuescope Claim Services ("CCC
Valuescope"), which is used by automobile insurance companies and independent
appraisers in processing claims involving private passenger vehicles that have
been heavily damaged or stolen.
As of September 30, 2004, White River Ventures Inc. ("White River") held
approximately 31% of our outstanding common stock. In September 1998, White
River Corporation, the sole shareholder of White River, was acquired by Demeter
Holdings Corporation, which is solely controlled by the President and Fellows of
Harvard College, a Massachusetts educational corporation and title-holding
company for the endowment fund of Harvard University. Charlesbank Capital
Partners LLC serves as the investment manager with respect to the investment of
White River in the Company.
NOTE 2- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying consolidated interim financial statements as of and for
the nine months ended September 30, 2004 and 2003 are unaudited. We are of the
opinion that all material adjustments, consisting only of normal recurring
adjustments, necessary for a fair presentation of our interim results of
operations and financial condition have been included. The results of operations
for any interim period should not be regarded as necessarily indicative of
results of operations for any future period. The consolidated interim financial
statements should be read in conjunction with our Annual Report on Form 10-K for
the year ended December 31, 2003 filed with the Securities and Exchange
Commission ("SEC").
Our consolidated financial statements are prepared in accordance with
accounting principles generally accepted in the United States of America
("GAAP"). These accounting principles require that we make certain estimates,
judgments and assumptions. We believe that our estimates, judgments and
assumptions are reasonable based on information available at the time that these
estimates, judgments and assumptions are made. These estimates, judgments and
assumptions can affect the reported amounts of assets and liabilities as of the
date of the consolidated financial statements as well as the reported amounts of
revenue and expenses during the periods presented. To the extent that there are
material differences between these estimates and actual results, our
consolidated financial statements may be affected.
Cash and cash equivalents
The Company considers all highly liquid investments purchased with an
original maturity of three months or less at the date of purchase to be cash
equivalents. All cash equivalents are carried at cost, which approximates fair
value. Any realized gains or losses are shown in the accompanying consolidated
statements of operations in other income or expense.
Revenue Recognition
Revenues are recognized after services are provided, when persuasive
evidence of an arrangement exists, the fee is fixed and determinable and when
collection is probable. Revenue is deferred until all of the above-mentioned
criteria are met. Revenues are reflected net of customer allowances, which are
based on the application of a predetermined percentage.
Goodwill
Under the provisions of Statement of Financial Accounting Standards
("SFAS") No. 141 "Business Combinations," the purchase method of accounting is
used for all business combinations. The purchase method of accounting requires
that the excess of purchase price paid over the estimated fair value of
identifiable tangible and intangible net assets of acquired businesses be
recorded as goodwill.
Under the provisions of SFAS No. 142 "Goodwill and Intangible Assets"
("SFAS 142"), goodwill is no longer amortized. Under SFAS 142, goodwill is
reviewed for impairment on at least an annual basis, when events or changes in
circumstances indicate that the carrying value of such assets may not be
recoverable. Recoverability of goodwill is evaluated using a two-step process.
The first step involves a comparison of the fair value of a reporting unit with
its carrying value. If the carrying value of the reporting unit exceeds its
fair value, the second step of the process involves a comparison of the implied
fair value and carrying value of the goodwill of that reporting unit. If the
carrying value of the goodwill exceeds the implied fair value of that goodwill,
an impairment loss is recognized in an amount equal to the excess. In
accordance with SFAS 142, we completed our annual impairment analysis during the
first quarter of 2004. We believe no events or changes in circumstances have
occurred since our annual impairment testing to indicate that the carrying value
of such assets may not be recoverable as of September 30, 2004.
The aggregate goodwill balance as of September 30, 2004 was $15.7 million.
The balance from the 1988 acquisition that included CCC Valuescope was $4.9
million, and the remaining balance of $10.8 million represents the goodwill from
the Comp-Est acquisition completed during February 2003.
Deferred Financing Costs
Deferred financing costs are capitalized and amortized as interest expense
over the term of CCC's underlying financing agreement. As of September 30,
2004, deferred financing costs of $3.5 million net of accumulated amortization
of $0.1 million was included in 'other assets' in the Company's consolidated
interim balance sheet.
Earnings Per Share Information
Basic earnings per share ("EPS") excludes the dilutive effect of common
stock equivalents and is computed by dividing net income by the weighted-average
number of shares outstanding during the period. Diluted EPS includes the
dilutive effect of common share equivalents and is computed using the
weighted-average number of common and common stock equivalent shares outstanding
during the period. Common stock equivalents consist of stock options and certain
other equity instruments. Using the treasury method, for the three and nine
month periods ended September 30, 2004, options to purchase a weighted average
number of 487,647 and 518,110 shares of common stock, respectively, were not
included in the computations of diluted earnings per share because the options'
exercise prices were greater than the average market price of the common shares
during the period.
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------------------------
2004 2003 2004 2003
--------------------------------------
Net income . . . . . . . . . . . . . . . . . . . . $ 483 $ 6,351 $12,032 $17,816
======================================
Weighted average common shares outstanding:
Shares attributable to common stock outstanding 22,965 26,256 25,351 26,210
Shares attributable to common stock equivalents
outstanding. . . . . . . . . . . . . . . . . . 1,196 1,228 1,278 1,411
--------------------------------------
24,161 27,484 26,629 27,621
======================================
Per share net income:
Basic . . . . . . . . . . . . . . . . . . . . . $ 0.02 $ 0.24 $ 0.47 $ 0.68
======================================
Diluted . . . . . . . . . . . . . . . . . . . . $ 0.02 $ 0.23 $ 0.45 $ 0.65
======================================
Stock Based Compensation
The Company follows SFAS No. 123, "Accounting for Stock Based Compensation"
("SFAS 123"). As allowed by SFAS 123, the Company has elected to continue to
account for its stock based compensation programs according to the provisions of
Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued
to Employees." The Company has adopted the disclosure provisions required by
SFAS 123.
The Company applies APB No. 25 in accounting for its stock option plans and
employee stock purchase plan, and accordingly, has not recognized compensation
cost in the accompanying consolidated statement of operations, except for the
compensation charge recognized in connection with the self-tender offer. Had
compensation cost been recognized based on fair value as of the grant dates as
prescribed by SFAS 123, the Company's net income applicable to common stock and
related per share amounts would have been impacted as indicated below (in
thousands, except per share data):
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------------------------
2004 2003 2004 2003
--------------------------------------
Net income:
As reported . . . . . . . . . . . . $ 483 $ 6,351 $12,032 $ 17,816
Pro forma . . . . . . . . . . . . . $ 58 $ 5,600 $10,561 $ 15,936
Per share net income - basic:
As reported . . . . . . . . . . . . $ 0.02 $ 0.24 $ 0.47 $ 0.68
Pro forma . . . . . . . . . . . . . $ 0.00 $ 0.21 $ 0.42 $ 0.61
Per share net income - diluted:
As reported . . . . . . . . . . . . $ 0.02 $ 0.23 $ 0.45 $ 0.65
Pro forma . . . . . . . . . . . . . $ 0.00 $ 0.20 $ 0.40 $ 0.58
Weighted average shares outstanding:
Basic . . . . . . . . . . . . . . . 22,965 26,256 25,351 26,210
Diluted . . . . . . . . . . . . . . 24,161 27,484 26,629 27,621
Assumptions used:
Expected volatility . . . . . . . . 66.7% 73.5 % 66.7% 73.5 %
Risk free rate. . . . . . . . . . . 3.4% 2.8 % 3.4% 2.8 %
Expected option life. . . . . . . . 5.5yrs 5.5yrs 5.5yrs 5.5 yrs
Dividend yield. . . . . . . . . . . - - - -
The stock-based employee compensation costs arising out of the restricted
stock issued are included in net income as reported and have been immaterial for
the three and nine months ended September 30, 2004 and 2003. A pre-tax non-cash
stock compensation charge relating to the exercise of options in connection with
the self-tender offer of approximately $13.1 million is also included in net
income as reported.
The effects of applying SFAS 123 in the above pro forma disclosures are not
necessarily indicative of future amounts as they do not include the effects of
awards granted prior to 1995, some of which would have had income statement
effects in 2004 and 2003. Additionally, future amounts are likely to be affected
by the number of grants awarded since additional awards are generally expected
to be made at varying amounts.
Pervasiveness of Estimates
The preparation of financial statements in conformity with GAAP requires
management to make estimates and assumptions that affect the reported amount of
assets and liabilities and disclosure of contingent assets and liabilities as of
the date of the consolidated financial statements, and that affect the reported
amounts of revenues and expenses during the reporting period. Actual results
could differ from these estimates.
Commitments and Contingencies
Loss contingencies are recorded as liabilities when it is probable that a
liability has been incurred and the amount of the loss is reasonably estimable.
Contingent liabilities are often resolved over long time periods. Estimating
probable losses requires analysis of multiple factors that often depend on
judgments about potential actions by third parties such as regulators. We
regularly evaluate current information available to us to determine whether such
accruals should be adjusted.
Indemnification Disclosure
In the normal course of business, we are a party to a variety of agreements
pursuant to which we may be obligated to indemnify the other party with respect
to certain matters. Generally, these obligations arise in the context of
agreements entered into by us, under which we customarily agree to hold the
other party harmless against losses arising from a breach of representations and
covenants related to such matters as title to assets sold, certain intellectual
property rights and, in certain circumstances, specified environmental matters.
These terms are common in the industry in which we conduct business. In each of
these circumstances, payment by us is subject to certain monetary and other
limitations and is conditioned on the other party making an adverse claim
pursuant to the procedures specified in the particular agreement, which
typically allow us to challenge the other party's claims.
We evaluate estimated losses for such indemnifications under SFAS No. 5,
"Accounting for Contingencies" as interpreted by the Financial Accounting
Standards Board ("FASB") Interpretation No. 45, "Guarantor's Accounting and
Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others" ("FIN 45"). We consider such factors as the degree of
probability of an unfavorable outcome and the ability to make a reasonable
estimate of the amount of loss. To date, we have not encountered material costs
as a result of such obligations and as of September 30, 2004, have not recorded
any liabilities related to such indemnifications in our financial statements, as
we do not believe the likelihood of a material obligation is probable.
NOTE 3 - INVESTMENT IN CHOICEPARTS
In 2000, we formed a new independent Company, ChoiceParts, LLC
("ChoiceParts"), with ADP and The Reynolds and Reynolds Company. ChoiceParts
operates an electronic parts exchange for the auto parts marketplace for
franchised auto retailers, collision repair facilities and other parts
suppliers. We have a 27.5% equity interest in ChoiceParts, which is accounted
for under the equity method.
Summary financial information for ChoiceParts is as follows (in thousands):
THREE MONTHS NINE MONTHS
ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------------------
2004 2003 2004 2003
-------------------------------
Revenues . . . . . . . . . . . $1,918 $2,604 $6,249 $8,582
===============================
Income (loss) from operations. $ 587 $ (298) $1,438 $ (294)
===============================
Net income (loss). . . . . . . $ 609 $ (298) $1,456 $ (318)
===============================
NOTE 4 - OTHER CURRENT ASSETS
Other current assets consisted of the following (in thousands):
SEPTEMBER 30, DECEMBER 31,
2004 2003
-----------------------------
Prepaid data royalties . . . . . . . . . . . . . . . . . . . $ 1,865 $ 1,948
Insurance reimbursement for litigation settlement. . . . . . 1,800 2,000
Prepaid equipment maintenance. . . . . . . . . . . . . . . . 1,245 1,261
Prepaid insurance. . . . . . . . . . . . . . . . . . . . . . 594 1,080
Deferred contract buyouts. . . . . . . . . . . . . . . . . . 507 -
Income tax receivable - research and experimentation credits 339 750
Other. . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,529 1,330
-----------------------------
Total. . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 7,879 $ 8,369
=============================
NOTE 5 - ACCRUED EXPENSES
Accrued expenses consisted of the following (in thousands):
SEPTEMBER 30, DECEMBER 31,
2004 2003
-----------------------------
Litigation settlements $ 7,961 $ 6,475
Compensation . . . . . 5,026 4,468
Health insurance . . . 1,407 1,256
Professional fees. . . 944 843
Restructuring charges. 939 860
Sales tax. . . . . . . 857 933
Other. . . . . . . . . 1,468 1,687
-----------------------------
Total. . . . . . . . . $ 18,602 $ 16,522
=============================
NOTE 6 - OTHER LIABILITIES
Other liabilities consisted of the following (in thousands):
SEPTEMBER 30, DECEMBER 31,
2004 2003
-----------------------------
Deferred rent $ 1,441 $ 2,140
Other, net. . 559 924
-----------------------------
Total . . . . $ 2,000 $ 3,064
=============================
NOTE 7 - LONG-TERM DEBT
On August 20, 2004, in conjunction with a self-tender offer, CCC entered
into a new credit agreement ( "Credit Agreement") replacing CCC's former credit
facility. The new agreement is in the form of a term loan ("Term Loan") for
$177.5 million and a revolving loan ("Revolving Loan") for $30.0 million.
Through September 30, 2004 the Company had no advances under the Revolving Loan.
As compared to the former credit facility, the Credit Agreement provides CCC
with improved terms and additional flexibility. The Credit Agreement contains
covenants that, among other things, restrict CCC's ability to sell or transfer
assets, make certain investments and make capital expenditures in addition to
certain financial covenants. The Credit Agreement is guaranteed by CCC and is
secured by a blanket first priority lien on substantially all of the assets of
CCC and its subsidiaries. CCC is also required to provide the lender with
quarterly and annual financial reports. The Company is also required to enter
into a hedging agreement that would result in at least 50% of the aggregate
principal amount borrowed under the Term Loan being effectively subject to a
fixed or maximum interest rate, no later than the 105th day after the closing
date of August 20, 2004. The Company currently is considering alternatives.
The Revolving Loan matures on August 20, 2009 and the Term Loan matures on
August 20, 2010. The quarterly scheduled principal payments on the Term Loan
are approximately $0.4 million through June 30, 2010 with a payment of $166.9
million due at maturity. All advances under the Credit Agreement bear interest,
at CCC's election, at the London Interbank Offered Rate ("LIBOR") plus a
variable spread based on our leverage ratio or the prime rate in effect from
time to time plus a variable spread based on our leverage ratio. CCC pays a
commitment fee of 0.50% on any unused portion of the Revolving Loan.
During the quarter, the weighted average interest rate was 4.6%. CCC made
cash principal and interest payments under the Term Loan of $7.4 million and
$1.0 million, respectively, during the quarter ended September 30, 2004. The
principal payment included a voluntary prepayment of $7.0 million.
In connection with the new Credit Agreement, the Company incurred financing
costs of approximately $3.6 million. These costs have been capitalized and will
be amortized as interest expense over the term of the underlying Credit
Agreement.
Maturities of long-term debt as of September 30, 2004 are as follows (in
thousands):
Remaining 2004. . . . . . $ 444
2005. . . . . . 1,775
2006. . . . . . 1,775
2007. . . . . . 1,775
2008. . . . . . 1,775
2009. . . . . . 1,775
Thereafter. . . . . . . . 160,737
--------
Total long-term debt $170,056
========
NOTE 8 - SELF-TENDER
During the third quarter of 2004, the Company's Board of Directors
authorized a self-tender offer to purchase up to $210.0 million of its common
stock at a price of $18.75 per share. The tender was fully subscribed and 11.2
million shares were purchased. The purchase was made through a fixed price
tender offer in which all of CCC's stockholders, vested option holders and
warrant holders, including employee benefit plans, were given the opportunity to
sell a portion of their shares at a price of $18.75 per share, without incurring
any brokerage fees or commissions. This represented a premium of approximately
26% over the closing stock price of $14.90 per share on July 21, 2004, the day
before the tender was announced. Since the number of shares tendered was
greater than 11,200,000, purchases were made based on a proration factor of
44.1049 percent. The shares that were purchased were retired. The self-tender
offer was funded by a term loan facility of $177.5 million and $32.5 million of
cash on hand.
The non-cash stock compensation charge of $13.1 million resulted from the
exercise of employee stock options in connection with the Company's self- tender
offer. The Company permitted employee stock option holders to participate in
the self-tender offer using a stock-for-stock cashless exercise. This triggered
variable stock compensation accounting for the 1997 and 2000 Stock Incentive
Plans, which resulted in a non-cash stock compensation charge. The
stock-for-stock cashless exercise was only allowed for purposes of participating
in the self-tender offer, as such, the company does not expect to record any
additional compensation expense associated with current or future options
granted under these plans. Following stock compensation accounting requirements,
the charge had to cover all vested employee stock options including those that
were not tendered and those that were unable to be exercised due to the 44
percent pro-ration factor. All stock option holders received the same terms and
conditions for their shares as shareholders and warrant holders.
The amount remaining on the balance sheet for additional paid-in capital
subsequent to the self-tender offer primarily relates to the warrants that were
issued as part of the Rights Offering completed in 2001 and remain unexercised.
NOTE 9 - TREASURY STOCK
In conjunction with the self-tender offer, vested option and warrant
holders were allowed to perform a stock-for-stock cashless exercise in which
shares valued at the closing market price of $17.72 on August 30, 2004, the date
the tender offer closed, were withheld to cover the exercise price of options
and warrants, as well as withholding taxes, which resulted in an increase to
treasury stock.
NOTE 10 - LITIGATION SETTLEMENT
In August 2004, the Company settled a dispute that had been pending
between the Company and certain of its insurers that had issued insurance
policies to the Company over the past several years. Under the terms of the
settlement, the insurers paid the Company approximately $4.8 million, and the
parties agreed to dismiss the legal proceedings relating to this matter and to
provide mutual releases. The settlement involved a lawsuit filed by the
Company's insurers in which the insurers sought a declaration that there was no
insurance coverage under certain policies for the pending litigation involving
the Company's vehicle valuation product, now known as CCC Valuescope.
We recorded a net charge of $1.9 million to increase our accrual for
settlement of the pending litigation relating to CCC Valuescope, from $4.3
million to $6.2 million.
The total benefit was due to the net result of the insurance settlement
described above of $4.8 million, less $0.3 million used for defense and
settlement costs and the increase in the accrual. See Note 12, "Legal
Proceedings" for further discussion.
NOTE 11 - RESTRUCTURING CHARGES
In 2001, the Company wrote off excess office space, located in Chicago,
which was occupied by a former business. During the second quarter of 2003, the
Company recorded a final charge of $1.1 million to revise the original expected
future sublease income from $2.3 million to $1.2 million as a result of entering
into a sublease agreement with a third party. The sublease is for the duration
of the existing term remaining on the current lease, which is through March 31,
2006.
During the second quarter of 2004, we recorded a charge of $0.9 million for
a realignment of our organization, which primarily related to severance costs
for 40 former employees. The restructuring has allowed us to streamline and
focus our implementation process and improve our overall sales and support
execution and is expected to generate cost savings in excess of $4.0 million
annually beginning in the third quarter of 2004.
The following summarizes the activity in the restructuring accrual (in
thousands):
EXCESS REDUCTION
FACILITIES IN FORCE
------------------------
Balance at December 31, 2003 $ 1,830 -
Cash payments (172) -
------------------------
Balance at March 31, 2004 1,658 -
Additional charges - 886
Cash payments (172) (212)
------------------------
Balance at June 30, 2004 1,486 674
Cash payments (180) (627)
------------------------
Balance at September 30, 2004 $ 1,306 $ 47
========================
NOTE 12 - LEGAL PROCEEDINGS
As disclosed in our Annual Report on Form 10-K for the year ended December
31, 2003, the Company has pending against it certain putative class actions and
individual actions in which the plaintiffs allege that their insurers, using
valuation reports prepared by CCC, offered them an inadequate amount for their
total loss vehicles. Set forth below is a discussion of developments with
respect to this litigation since the discussion in the Company's Annual Report
on Form 10-K for the year ended December 31, 2003 and in the Company's Quarterly
Reports on Form 10-Q for the periods ended March 31, 2004, and June 30, 2004.
On September 21, 2004, the Los Angeles County Superior Court sustained
CCC's demurrer and granted CCC's motion to strike the claims asserted against
CCC in RIVERA v. STATE FARM MUTUAL AUTOMOBILE INSURANCE COMPANY and CCC
INFORMATION SERVICES INC., Case No. BC200881 (filed October 31, 2001; served on
CCC on March 9, 2004). The Court also sustained the demurrer and granted the
motion to strike filed by CCC's insurance company co-defendant, State Farm
Mutual Automobile Insurance Company, and awarded costs in favor of CCC and
State Farm.
SUSANNA COOK v. DAIRYLAND INS. CO., SENTRY INS., and CCC INFORMATION
SERVICES INC., No. 2000 L-1 (filed January 31, 2000 in the Circuit Court of
Johnson County, Illinois). On June 7, 2004, the Circuit Court granted CCC's
motion for summary judgment and dismissed all of plaintiff's claims against CCC.
The Court also granted the summary judgment motions of CCC's insurance company
co-defendants. On or about July 23, 2004, the Court denied plaintiff's motion
seeking reconsideration of the Court's ruling. On or about August 12, 2004,
plaintiff filed a Notice of Appeal before the Clerk of the Appellate Court of
Illinois, Fifth Judicial District.
GILKERSON V. NATIONWIDE MUT. INS. CO., and CONSOLIDATED COLLATERAL CO., No.
04-C-2147 (filed August 3, 2004 in the Circuit Court of Kanawha County, West
Virginia). Plaintiff alleges four counts against her purported insurer,
Nationwide Mutual Insurance Company ("Nationwide"), and CCC arising from the
total loss of her vehicle: breach of contract; common law fraud and intentional
infliction of emotional distress; violation of common law duty of good faith and
fair dealing; and fraud in violation of the West Virginia Unfair Trade
Practices Act. Nationwide removed the case to the U.S. District Court for the
Southern District of West Virginia, No. 2:04-0957, on August 31, 2004.
TAYLOR V. SOUTHERN FARM BUREAU CAS. INS. CO., and CCC INFO. SERVS., INC.,
No. 2004-0095 (filed April 8, 2004 in the Circuit Court of Tunica County,
Mississippi). Plaintiff alleges certain claims against her purported insurer,
Southern Farm Bureau Casualty Insurance Company , and CCC arising from the total
loss of her vehicle. Against CCC, Plaintiff asserts claims for conspiracy to
commit fraud in violation of the Mississippi Consumer Protection Act and
conspiracy to commit common law fraud.
CCC and certain of its insurance company customers have continued to engage
in settlement discussions with the plaintiffs attorneys who filed certain cases
in Johnson County and Madison County, Illinois. As negotiations have
progressed, the number of participants and the cost to CCC of the proposed
settlement have fluctuated. Based on recent developments in those negotiations,
the initial settlement described in the Annual Report on Form 10-K for the year
ended December 31, 2003, has expanded and would resolve potential claims arising
out of approximately 29% of the Company's total transaction volume (up from
approximately 17%) for valuations involving first party claims during the time
period covered by the lawsuits. The Company anticipates that this settlement
would eliminate the viability of class claims in 7 of the 11 putative class
actions pending in the trial or appellate courts against the Company and certain
of its customers. These settlement negotiations are ongoing, but at this time,
CCC and its customers participating in the settlement have reached an agreement
in principle as to CCC's proposed contribution to the proposed settlement. Upon
completion of the settlement negotiations, CCC would agree to enter into the
settlement for the purpose of avoiding the expense and distraction of protracted
litigation, without any express or implied acknowledgement of any fault or
liability to the plaintiffs, the putative class or anyone else.
During 2001, CCC recorded a pre-tax charge of $4.3 million, net of an
expected insurance reimbursement of $2.0 million, as an estimate of the amount
that CCC will contribute toward a potential settlement that would resolve
potential claims arising out of approximately 30% of CCC's transaction volume
during the time period covered by the lawsuits. As a result of the
above-described developments with respect to that potential settlement, the
Company has increased the accrual by a net amount of $1.9 million, from $4.3
million to $6.2 million. This increase is due to several factors, including the
growth that has occurred in the size of the putative classes of insureds over
time, increases in certain costs associated with the settlement, and changes in
the terms of the settlement as between CCC and its participating customers.
Additionally, the expected insurance reimbursement has been reduced from $2.0
million to $1.8 million. CCC now estimates that this potential settlement would
resolve potential claims arising out of approximately 29% of the Company's
transaction volume for valuations involving first party claims during the period
covered by the lawsuits. However, the consummation of the settlement with the
plaintiffs and the amount of CCC's contribution to the proposed settlement
remain subject to a number of significant contingencies, including, among other
things, the extent of participation on the part of CCC's insurance company
customers, the negotiation of the settlement terms between the plaintiffs and
those of CCC's customers that are participating in the settlement negotiations,
as well as judicial approval of any proposed settlement agreement. As a result,
at this time, there is no assurance that the settlement will be successfully
consummated or, if completed, that the final settlement will be on the terms or
levels of participation set forth above. There is also no assurance that
existing or potential claims arising out of the remainder of CCC's total
transaction volume could be settled on comparable terms.
CCC intends to vigorously defend its interests in all of the above
described pending matters and claims to which it is a party and support its
customers in other actions. Due to the numerous legal and factual issues that
must be resolved during the course of litigation, CCC is unable to predict the
ultimate outcome of any of these actions. If CCC was held liable in any of the
actions (or otherwise concludes that it is in CCC's best interest to settle any
of them), CCC could be required to pay monetary damages (or settlement
payments). Depending upon the theory of recovery or the resolution of the
plaintiff's claims for compensatory and punitive damages, or potential claims
for indemnification or contribution by CCC's customers in any of the actions,
these monetary damages (or settlement payments) could be substantial and could
have a material adverse effect on CCC's business, financial condition or results
of operations. CCC is unable to estimate the magnitude of its exposure, if any,
at this time. As additional information is gathered and the lawsuits proceed,
CCC will continue to assess the potential impact on the Company.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FORWARD-LOOKING INFORMATION
This report contains statements that constitute "forward-looking
statements" within the meaning of Section 27A of the Securities Act of 1933 and
Section 21E of the Securities Exchange Act of 1934 and are subject to the safe
harbor provisions of those sections and the Private Securities Litigation Reform
Act of 1995. Some of these forward-looking statements may be identified by the
use of words in the statements such as "anticipate," "estimate," "expect,"
"project," "intend," "plan," "believe," or other words and terms of similar
meaning. Readers are cautioned that any such forward-looking statements are not
guarantees of future performance and involve risks and uncertainties, including
those described in our annual report on Form 10-K for the year ended December
31, 2003 and our other filings with the SEC, and that actual results or
developments may differ materially from those in the forward-looking statements.
Specific factors that might cause actual results to differ from our expectations
include, but are not limited to, competition in the automotive claims and
collision repair industries, the ability to develop new products and services,
the prolonged sales and implementation cycle of some of the company's new
products, the ability to protect trade secrets and proprietary information, the
ability to generate the cash flow necessary to meet our obligations, the outcome
of certain legal proceedings, and other factors. Readers are cautioned not to
place undue reliance on these forward-looking statements, which reflect
management's analysis, judgment, belief or expectation only as of the date
hereof. We have based these forward-looking statements on information currently
available and disclaim any intention or obligation to update or revise any
forward-looking statement.
GENERAL
Our products and services fall into five categories or "suites": CCC
Pathways, CCC Valuescope, Workflow Products, Information Services and Other
Products and Services. Each of these products and services suites is described
below. For additional information regarding these suites and the various
products and services in each suite, please refer to the "Business" section of
our annual report on Form 10-K for the year ended December 31, 2003.
CCC has long been a leader and innovator in the automotive claims and
collision repair market. CCC has approximately 21,000 collision
repair-facilities installations, located in all 50 states, and over 350
insurance company customers in the United States. We have also pioneered
value-added network communications between industries involved in claims
settlement, and today our EZNet communications network handles an average of
over 1 million claims-related transactions each business day. CCC Valuescope is
also an established market leader. We continue to seek to develop products and
services to anticipate and respond to changing demands in the auto-claims
industry.
CCC PATHWAYS
This suite consists of our collision estimating products:
-CCC Pathways Appraisal Solution (for insurance customers);
-CCC Pathways Estimating Solution (for collision repair facility
customers);
-CCC Pathways IndependentAppraiserSolution (for independent appraisers);
-CCC Pathways Digital Imaging;
-Recycled Parts Service; and
-Comp-Est Estimating Solution
CCC Pathways helps automobile insurance companies, collision-repair
facilities and independent appraisers manage aspects of their day-to-day
automobile claim activities, including receipt of new assignments, preparation
of estimates, communication of status and completed activity and maintenance of
notes and reports. The CCC Pathways platform allows customers to integrate our
other services, including CCC Pathways Digital Imaging, Recycled Parts Service
and CCC Valuescope, in order to organize individual claim information in
electronic workfiles, which can be stored either via our EZNet communications
network or our web-based open workflow solution, both are described later in
this section under "Workflow Products."
Pathways Digital Imaging allows our customers to transmit digital images of
damaged vehicles to the Pathways estimate workfile. Customers using Pathways
with our Recycled Parts Service also have access to a database that provides
local part availability and price information on over 22.7 million available
recycled or salvage parts.
Comp-Est Estimating Solution is our collision estimating software that
targets smaller repair facilities that do not communicate electronically with
insurance companies. This product also allows our customers to access the MOTOR
Crash Estimating Guide and provides them with the ability to generate estimates
and supplements.
CCC VALUESCOPE
CCC Valuescope is used primarily by automobile insurance companies and
independent appraisers in processing claims involving private passenger vehicles
that have been heavily damaged or stolen. Typically, when the cost to repair a
vehicle exceeds 70% to 90% of the vehicle's value, the automobile insurance
company will declare that vehicle to be a "total loss." In such cases, we
provide the insurer or independent appraiser with the local market value of the
vehicle to assist in processing the claim. The valuation service can be obtained
for both commercial and recreational vehicles as well as for specialty vehicles,
such as, trucks, semi-trailers, marine craft, motorcycles and pre-fabricated
housing.
WORKFLOW PRODUCTS
This suite includes the following products and services:
-EZNet Communications Network ("EZNet");
-CCC Pathways Appraisal Quality Advisor and Quality Advisor Appraisal
Review ("QAAR Plus" )
-CCC Autoverse
-CCC Accumark Reinspection
EZNet is a secure network that allows clients to communicate estimates and
claim information electronically. The network allows customers to electronically
communicate claim information, including assignments, workfiles, estimates,
images and auditable estimate data, internally and among insurance company
appraisers, collision repair facilities, independent appraisers, insurance
company reinspectors and other parties involved in the automobile claims
process. EZNet allows customers to share information and review claims,
regardless of the location and provides them with an electronic library to
catalog, organize and store completed claims files.
QAAR Plus allows for electronic audits of automobile repair estimates
prepared by direct repair facilities, independent appraisers and internal
insurance staff for quality control and for identification and correction of
errors or discrepancies prior to the completion of repairs. In addition, CCC
Pathways Appraisal Quality Solution allows automobile insurance companies to use
available historical data to track the performance of appraisers and provides a
mechanism to establish and monitor compliance with certain reinspection
objectives developed by the automobile insurance company. For example, CCC
Pathways Quality Advisor allows an insurance company to establish certain
criteria for reviewing the preparation of estimates, which in turn allows the
insurance company to determine if an appraiser prepared an accurate estimate.
CCC Autoverse. Our CCC Autoverse product consists of CCC Autoverse Claim
Management (for insurance customers), CCC Autoverse Repair Management (for
multiple-location repair facilities) and CCC Autoverse Appraiser Management (for
independent appraiser customers). CCC Autoverse is a web-based open workflow
solution that allows for the exchange of claims information derived from using
CCC Pathways products as well as established collision estimating systems that
meet the Collision Industry Electronic Commerce Association Estimating
Management System standard. CCC Autoverse products permit the free flow of
information between those who write damage estimates and insurers who process
claims.
CCC Autoverse Claim Management allows the insurance adjuster to review
estimates as well as digital images, supplements, claim summary reports and
other documents associated with the claim. In addition, CCC Autoverse Claim
Management allows the insurance adjuster to review events, enter new assignments
and request and record payment information. CCC Autoverse Claim Management also
provides reporting for assignment status.
CCC Autoverse Repair Management allows the CCC Pathways user and non-user
repair facility operator to receive assignments into a central location from
multiple insurance carriers. Through the CCC Autoverse dispatch feature,
multi-location repair facilities are provided the ability to load balanced work
across their different locations. This permits the multi-location operator to
reduce their cycle time and improve their shop utilization.
CCC Accumark Reinspection. Our next-generation, real-time, web-based
reinspection tool offers advanced management of company appraisal procedures and
tracking capabilities. The product automatically reviews each line of an
appraisal within a customized framework of company-established rules.
INFORMATION SERVICES
ClaimScope Navigator. ClaimScope Navigator is our on-line, web-based
information service that provides a comprehensive method to create management
reports comparing industry and company performance using CCC Pathways and CCC
Valuescope data. ClaimScope Navigator permits our customers to conduct in-depth
analyses of claim information by parts and labor usage, cycle time measurements
and vehicle type and condition.
OTHER PRODUCTS AND SERVICES
Pathways Enterprise Solution and Pathways Professional Advantage .
Pathways Enterprise Solution is an automotive repair facility management
software system for multiple location collision repair facilities that allows
them to manage accounts, prepare employee schedules and perform various other
management functions. Pathways Professional Advantage, similar to Pathways
Enterprise Solution, is a repair facility management software system for a
single store location.
CARS Direct is a multi-vendor, on-line car rental reservation and
management system, which allows insurers control over car class selection, rates
and extensions. We sell the CARS Direct service on a per-transaction basis and
bill at the beginning of the month following the transactions.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Management's Discussion and Analysis of our financial condition and results
of operations are based upon our consolidated financial statements, which have
been prepared in accordance with GAAP. We review the accounting policies,
including those described in the Notes to the Consolidated Financial Statements,
used in reporting our financial results on a regular basis. The preparation of
these financial statements requires us to make estimates, assumptions and
judgments that affect the reported amounts of assets, liabilities, revenues and
expenses and related disclosure of contingent assets and liabilities. On an
on-going basis, we evaluate our estimates, including those related to our
accounts receivable, income taxes, goodwill, intangibles, software development,
fair value of financial instruments and commitments and contingencies. We base
our estimates on historical experience and on various other assumptions that are
believed to be reasonable under the circumstances, the results of which form the
basis for making judgments about the carrying values of assets and liabilities.
Actual results may differ from these estimates under different assumptions or
conditions. Our senior management has reviewed these critical accounting
policies and related disclosures with the Audit Committee of our Board of
Directors and Disclosure Committee. See "Preparation of Financial Information"
in this section for further discussion of the Disclosure Committee.
We believe that the following critical accounting policies can have a
significant impact on our results of operations, financial position and
financial statement disclosures and require the most difficult, subjective and
complex estimates and judgments.
- - Accounts Receivable
- - Income Taxes
- - Goodwill and Intangibles
- - Software Development Costs
- - Fair Value of Financial Instruments
- - Commitments and Contingencies
- - Stock Compensation Expense
For a detailed discussion on the application of these accounting policies,
see "Item 7, Management's Discussion and Analysis of Financial Condition and
Results of Operations" in our Annual Report on Form 10-K for the year ended
December 31, 2003.
During the first quarter of 2004 we implemented new performance
compensation plans. Accordingly, the methodology for recognizing annual
performance compensation expenses changed from the prior year. Our objective
was to directly correlate our quarterly bonus achievement and accrual more
closely with the performance against our growth targets and corporate objectives
that drive our variable compensation plans. Under this new method, we will be
more closely linking achievement against our annual growth targets by accruing
the bonus based on certain year-to-date growth metrics over the prior year.
Under the historic method, a proportionate amount of the projected annual payout
was recorded each quarter and was adjusted when full year annual projections
were revised. As a result, we expect to see more stability in the selling,
general and administrative expense line on a quarter-to-quarter basis when
measured as a percentage of revenue.
PREPARATION OF FINANCIAL INFORMATION
We believe that the application of accounting standards is as important as
the underlying financial data in reporting our financial position, results of
operations and cash flows. We believe that our accounting policies are prudent
and provide a clear view of our financial performance. In 2002, we formed a
Disclosure Committee, composed of senior management, including senior financial
and legal personnel, to help ensure the completeness and accuracy of our
financial results and disclosures. In addition, prior to the release of our
financial results, key management reviews our annual and quarterly results,
along with key accounting policies and estimates, with the Audit Committee of
our Board of Directors.
REGULATION
As disclosed in our Annual Report on Form 10-K for the year ended December
31, 2003, the Company is aware of a case pending in the Superior Court of the
State of California for the County of Los Angeles captioned PERSONAL INSURANCE
FEDERATION OF CALIFORNIA, et al. v. JOHN GARAMENDI, INSURANCE COMMISSIONER OF
THE STATE OF CALIFORNIA, Case No. BC298284 (filed July 1, 2003). CCC has
further learned that on or about June 7, 2004, a partial settlement was reached
in that litigation among the parties thereto. Pursuant to that settlement, the
Department of Insurance was allowed to implement and enforce certain provisions
of the proposed amendments to the Fair Claims Settlement Practices Regulations
that had been preliminarily enjoined by the Court. Valuation sources in
California were required to change certain aspects of their methodology on or
before October 4, 2004 in order to comply with these new requirements. CCC, in
turn, implemented the necessary changes to comply with the new requirements
prior to that date.
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 2004 COMPARED WITH THREE MONTHS ENDED SEPTEMBER
30, 2003
Operating Income. Operating income decreased quarter-over-quarter from 2003
to 2004 by $9.3 million, to $1.4 million, due to an increase in operating
expenses of $9.7 million partially offset by an increase in revenue of $0.5
million. Included in the operating expenses for the current quarter were a
non-cash stock compensation expense of $13.1 million and a $2.6 million net
benefit related to a litigation settlement and an increase to our accrual for
settlement of the litigation relating to CCC Valuescope. Our operating margin
(operating income as a percentage of revenue) decreased to 2.9% for the quarter
ended September 30, 2004 compared to 22.0% for the same quarter in 2003.
Revenues. Revenues for each of our product and service suites are
summarized as follows (in thousands):
THREE MONTHS ENDED SEPTEMBER 30, VARIANCE
2004 2003 INCREASE (DECREASE)
------------------------------- ------------------
Pathways. . . . . . . . . . $30,937 63.0% $29,504 60.7% $1,433 4.9%
CCC Valuescope. . . . . . . 10,301 21.0 10,720 22.0 (419) (3.9)
Workflow Products . . . . . 6,391 13.0 6,645 13.7 (254) (3.8)
Information Services. . . . 511 1.0 445 0.9 66 14.8
Other Products and Services 952 2.0 1,307 2.7 (355) (27.2)
--------------------------------------------------
Total . . . . . . . . . . . $49,092 100.0% $48,621 100.0% $ 471 1.0%
==================================================
Revenues from our CCC Pathways products increased in the third quarter of
2004 by $1.4 million, or 4.9%, compared to the third quarter of last year due to
the growth of our estimating solutions in both the repair facility and insurance
channels, as well as an increase in sales of our Recycled Parts Service
solution to insurance carriers.
Revenues from our CCC Valuescope suite decreased as a result of pricing
declines due to recent contract renewals, which were partially offset by an
increase in transaction volumes.
Revenues from our workflow product suite decreased slightly from the prior
year as growth in Autoverse was offset by a decrease in revenues from EZNet.
While growth in Autoverse was strong, storms in the Southeast slowed the sales
and implementation cycle for the product, as processing of storm-related auto
claims became the priority for a few of our customers in the third quarter. As
a result, these customers delayed the rollout of Autoverse during the quarter.
The decrease in revenue from EZNet was attributable to a decrease in volume
transactions as well as the impact of pricing declines due to recent customer
renewal activity.
Revenues from our other products decreased in line with the Company's plan
to exit the customer hardware business and a planned phase-out by a customer of
our CARS Direct service.
Operating Expenses. Operating expenses as a percentage of revenues are
summarized as follows (dollars in thousands):
THREE MONTHS ENDED SEPTEMBER 30, VARIANCE
2004 2003 INCREASE (DECREASE)
--------------------------------- -------------------
Revenues $49,092 100.0% $48,621 100.0% $ 471 1.0%
Production and Customer Support 7,976 16.1 8,279 17.0 (303) (3.7)
Commissions, Royalties and Licenses 3,166 6.4 3,184 6.6 (18) (0.6)
Selling, General and Administrative 17,086 34.8 16,699 34.3 387 2.3
Depreciation and Amortization 1,719 3.5 1,944 4.0 (225) (11.6)
Product Development and Programming 7,175 14.6 7,838 16.1 (663) (8.5)
Stock compensation expense non-cash 13,139 26.8 - - 13,139 -
Litigation Settlement (2,586) (5.3) - - (2,586) -
---------------------------------------------------
Total Operating Expenses $47,675 97.1% $37,944 78.0% $ 9,731 25.6%
===================================================
Production and Customer Support. Production and Customer Support expenses
were down quarter-over-quarter from 2003 to 2004 due to costs incurred last
year as part of the move to complete the implementation of a new customer
support model.
Selling, General and Administrative. Selling, general and administrative
expenses increased slightly quarter-over-quarter from 2003 to 2004 as a result
of an increase to certain incentive compensation costs tied to business
performance. During the first quarter of 2004 we implemented new performance
compensation plans, and as a result, the methodology for recognizing annual
performance compensation expenses changed from the prior year. The increase was
partially offset by savings generated from a realignment of our organization
that took place during the second quarter of 2004.
Depreciation and Amortization. Depreciation and amortization expenses
decreased as a result of fewer investments in software and customer-leased
computer equipment as well as the use of certain software that is now fully
depreciated.
Product Development and Programming. The decrease in product development
and programming expenses was also due primarily to the realignment of our
organization that took place during the second quarter of 2004.
Stock Compensation Expense Non-Cash. The non-cash stock compensation
charge of $13.1 million resulted from the exercise of employee stock options in
connection with the Company's self- tender offer. The Company permitted
employee stock option holders to participate in the self-tender offer using a
stock-for-stock cashless exercise. This triggered variable stock compensation
accounting for the 1997 and 2000 Stock Incentive Plans, which resulted in a
non-cash stock compensation charge. The stock-for-stock cashless exercise was
only allowed for purposes of participating in the self-tender offer, as such,
the company does not expect to record any additional compensation expense
associated with current or future options granted under these plans. Following
stock compensation accounting requirements, the charge had to cover all vested
employee stock options including those that were not tendered and those that
were unable to be exercised due to the 44 percent pro-ration factor. All stock
option holders received the same terms and conditions for their shares as
shareholders and warrant holders.
Litigation Settlement. During the third quarter of 2004, the Company
received $4.8 million as a result of the settlement of a lawsuit filed by
certain of the Company's insurers in which the insurers sought a declaration
that there was no insurance coverage under certain policies for the pending
litigation involving the Company's vehicle valuation product, now known as CCC
Valuescope. We also recorded a net charge of $1.9 million to increase our
accrual for settlement of the litigation relating to CCC Valuescope, from $4.3
million to $6.2 million. The net result of the insurance settlement of $4.8
million, after the $1.9 million charge and the deduction of approximately $0.3
million for defense and settlement costs resulted in a net pre-tax benefit of
$2.6 million for the quarter.
Interest Expense. On August 20, 2004, in conjunction with a self-tender
offer, CCC entered into a Credit Agreement in the form of a Term Loan for $177.5
million and a Revolving Loan for $30.0 million. Through September 30, 2004 the
Company had no advances under the Revolving Loan. All advances under the Credit
Agreement bear interest, at CCC's election, at the LIBOR plus a variable spread
based on our leverage ratio or the prime rate in effect from time to time plus a
variable spread based on our leverage ratio. CCC pays a commitment fee of 0.50%
on any unused portion of the Revolving Loan.
During the quarter, the weighted average interest rate was 4.6%. CCC made
interest payments under the Term Loan of $1.0 million, during the quarter ended
September 30, 2004.
In connection with the new Credit Agreement, the Company incurred financing
costs of approximately $3.6 million. These costs have been capitalized and will
be amortized as interest expense over the term of the underlying Credit
Agreement.
NINE MONTHS ENDED SEPTEMBER 30, 2004 COMPARED WITH NINE MONTHS ENDED SEPTEMBER
30, 2003
Operating Income. Operating income decreased for the nine months ended
September 30 from 2003 to 2004 by $9.3 million, to $20.1 million from $29.4
million due to a non-cash stock compensation expense of $13.1 million, partially
offset by an increase in revenue of $3.7 million, and a $2.6 million net benefit
related to a litigation settlement and an increase to our accrual for settlement
of the litigation relating to CCC Valuescope. Our operating margin (operating
income as a percentage of revenue) decreased to 13.5% for the nine months ended
September 30, 2004 compared to 20.4% for the nine months ended September 30,
2003.
Revenues. Revenues for each of our product and service suites are
summarized as follows (in thousands):
NINE MONTHS ENDED SEPTEMBER 30, VARIANCE
2004 2003 INCREASE (DECREASE)
--------------------------------- ------------------
Pathways. . . . . . . . . . $ 93,366 63.0% $ 88,018 60.9% $ 5,348 6.1%
CCC Valuescope. . . . . . . 30,601 20.6 31,655 21.9 (1,054) (3.3)
Workflow Products . . . . . 19,190 13.0 19,645 13.6 (455) (2.3)
Information Services. . . . 1,517 1.0 1,239 0.9 278 22.4
Other Products and Services 3,494 2.4 3,893 2.7 (399) (10.2)
----------------------------------------------------
Total . . . . . . . . . . . $148,168 100.0% $144,450 100.0% $ 3,718 2.6%
====================================================
Revenues from our CCC Pathways products increased year-over-year due to the
acquisition of Comp-Est being completed at the end of February 2003. Also
contributing to the growth in this suite was increased sales of our Recycled
Parts Service to insurance companies as well as continued growth of our CCC
Pathways solutions in the repair facility channel.
Revenues from CCC Valuescope decreased as a result of pricing declines due
to contract renewals, which were not offset by transaction volumes. We had
expected transaction volumes to increase enough to offset the pricing declines,
but this did not occur, as many of our insurance customers experienced a
decrease in claim volumes.
Revenues from our workflow product suite decreased slightly from the prior
year. The gains we made with Autoverse during the first half of the year
compared to the prior year were partially offset by a decline in revenue from
EZNet. The decreased revenue from EZNet was attributable to a decrease in volume
transactions as well as the impact of pricing declines due to recent customer
renewal activity.
Revenue from our information services product suite increased due to higher
sales of our management information tools to both insurance companies and repair
facilities.
Revenues from our other products decreased in line with the Company's plan
to exit the customer hardware business and a planned phase-out by a customer of
our CARS Direct service
Operating Expenses. Operating expenses as a percentage of revenues are
summarized as follows (dollars in thousands):
NINE MONTHS ENDED SEPTEMBER 30, VARIANCE
2004 2003 INCREASE (DECREASE)
-----------------------------------------------------
Revenues $148,168 100.0% $144,450 100.0% $ 3,718 2.6%
Production and Customer Support 24,132 16.3 23,377 16.2 755 3.2
Commissions, Royalties and Licenses 9,485 6.4 8,614 6.0 871 10.1
Selling, General and Administrative 54,120 36.5 52,415 36.3 1,705 3.3
Depreciation and Amortization 5,628 3.8 5,888 4.1 (260) (4.4)
Product Development and Programming 23,302 15.7 23,690 16.4 (388) (1.6)
Stock compensation expense non-cash 13,139 8.9 - - 13,139 -
Restructuring Charges 1,061 886 0.6 1,061 0.7 (175) (16.5)
Litigation Settlement (2,586) (1.7) - - (2,586) -
-----------------------------------------------------
Total Operating Expenses $128,106 86.5% $115,045 79.7% $13,061 11.3%
=====================================================
Production and Customer Support. Production and customer support expenses
increased compared to last year due mainly to higher than anticipated training
and transition costs needed to complete the implementation of the new customer
support model, that is, moving to a universal service representative model.
While we finished the migration to the new model during the fourth quarter of
2003, we continued to incur additional training and transition expense related
to this project during the first quarter of 2004.
Commissions, Royalties and Licenses. Commissions, royalties and licenses
expenses increased partially due to the inclusion of a full nine months' of data
license fees for the Comp-Est product versus only seven months of expense being
included last year, since the acquisition was completed at the end of February
2003.
Selling, General and Administrative. Selling, general and administrative
expenses increased from 2003 to 2004 mainly due to the items described below:
At the end of 2003, the Company changed its administrator of the Company's
401(k) Retirement Savings & Investment Plan ("the Plan"). The new administrator
of the Plan performed the non-discrimination test for 1999 through 2002, and
concluded the test had previously been performed incorrectly. As a result,
during the second quarter of 2004, the Company recorded a charge of
approximately $0.8 million related to additional contributions ($0.7 million)
and penalties ($0.1 million) the Company needs to make in order to meet the
non-discrimination test for the years 1999 through 2002.
Also contributing to the increase in selling, general and administrative
expenses was approximately $1.8 million of costs associated with our sales
force, increased insurance premiums and expenses incurred to consolidate and
make improvements to our main office in Chicago.
The increase was partially offset by savings of approximately $0.5 million
generated during the third quarter from a realignment of our organization that
took place during the second quarter of 2004. The restructuring has allowed us
to better streamline and focus our implementation process and improve our
overall sales and support execution.
There was also a favorable impact of approximately $1.3 million, due to a
change in methodology for annual performance compensation expenses, as well as
actual performance against our plan targets during the nine months ended
September 30, 2004. During the first quarter of 2004 we implemented new
performance compensation plans, and as a result, the methodology for recognizing
annual performance compensation expenses changed from the prior year.
Depreciation and Amortization. Depreciation and amortization decreased as a
result of fewer investments in software and customer leased computer equipment
as well as using certain software that is now fully depreciated. The decrease
was partially offset by an increase in amortization related to Comp-Est's
intangibles, since 2003 did not reflect a full year of amortization for Comp-Est
due to the timing of the acquisition.
Product Development and Programming. Product development and programming
expenses also decreased slightly due to the realignment of our organization that
took place during the second quarter of 2004 resulting in savings of
approximately $0.5 million. The timing of our continued investment in
development of a new shop management product partially offset these savings.
Stock Compensation Expense Non-Cash. The non-cash stock compensation
charge of $13.1 million resulted from the exercise of employee stock options in
connection with the Company's self- tender offer. The Company permitted
employee stock option holders to participate in the self-tender offer using a
stock-for-stock cashless exercise. This triggered variable stock compensation
accounting for the 1997 and 2000 Stock Incentive Plans, which resulted in a
non-cash stock compensation charge. The stock-for-stock cashless exercise was
only allowed for purposes of participating in the self-tender offer, as such,
the company does not expect to record any additional compensation expense
associated with current or future options granted under these plans. Following
stock compensation accounting requirements, the charge had to cover all vested
employee stock options including those that were not tendered and those that
were unable to be exercised due to the 44 percent pro-ration factor. All stock
option holders received the same terms and conditions for their shares as
shareholders and warrant holders.
Restructuring Charges. During the second quarter of 2004, we recorded a
charge of $0.9 million for a realignment of our organization, which primarily
related to severance costs for 40 former employees. The restructuring has
allowed us to better streamline and focus our implementation process and improve
our overall sales and support execution and is expected to generate cost savings
in excess of $4.0 million annually beginning in the third quarter of 2004.
During the second quarter of 2003, we recorded a final charge related to excess
office space, located in Chicago, which was occupied by a former business.
Litigation Settlement. During the third quarter of 2004, the Company
received $4.8 million as a result of the settlement of a lawsuit filed by
certain of the Company's insurers in which the insurers sought a declaration
that there was no insurance coverage under certain policies for the pending
litigation involving the Company's vehicle valuation product, now known as CCC
Valuescope. We also recorded a net charge of $1.9 million to increase our
accrual for settlement of the litigation relating to CCC Valuescope, from $4.3
million to $6.2 million. The net result of the insurance settlement of $4.8
million, after the $1.9 million charge and the deduction of approximately $0.3
million for defense and settlement costs resulted in a net pre-tax benefit of
$2.6 million for the quarter.
Interest Expense. On August 20, 2004, in conjunction with a self-tender
offer, CCC entered into a Credit Agreement in the form of a Term Loan for $177.5
million and a Revolving Loan for $30.0 million. Through September 30, 2004 the
Company had no advances under the Revolving Loan. All advances under the Credit
Agreement bear interest, at CCC's election, at the LIBOR plus a variable spread
based on our leverage ratio or the prime rate in effect from time to time plus a
variable spread based on our leverage ratio. CCC pays a commitment fee of 0.50%
on any unused portion of the Revolving Loan.
During the quarter, the weighted average interest rate was 4.6%. CCC made
interest payments under the Term Loan of $1.0 million, during the quarter ended
September 30, 2004.
In connection with the new Credit Agreement, the Company incurred financing
costs of approximately $3.6 million. These costs have been capitalized and will
be amortized as interest expense over the term of the underlying Credit
Agreement.
OUTLOOK
The company issued the following guidance for the fourth quarter and full
year 2004:
Revenue growth for the fourth quarter is expected to be in the 1 to 2
percent range versus the prior year, which would produce full year revenue
growth in the 2 to 3 percent range. This is a change from our previous guidance
of 3 to 4 percent.
Operating income for the fourth quarter should be in the $12 to $13 million
range, with full year operating income expected to be in the $32 to $33 million
range, including the impact of the charges taken in the second quarter of $1.7
million and the impact of the net charge of $10.5 million taken in the third
quarter. This is a decrease from our previous guidance of $43 to $45 million
due to the impact of the net charge taken in the third quarter.
Earnings per share for the fourth quarter is expected to be in the $0.36 to
$0.39 per share range. Earnings per share for 2004 is expected to be in the
$0.75 to $0.77 per share range, which represents a decrease from our previous
guidance of $0.96 to $1.00 per share. Earnings per share guidance for the full
year includes the impact of the reduction in the number of shares outstanding
following completion of the self-tender offer as well as the effect of the $0.04
per share in charges taken in the second quarter and the $0.27 per share net
charge recorded in the third quarter. Please note that due to the timing of the
tender offer, the fully diluted share base expected to be used for the fourth
quarter earnings per share calculation is much lower than the fully diluted
share base that is expected to be used for the full year earnings per share
calculation. As a result, adding together the earnings per share for the
individual quarters will not produce the full year earnings per share figure.
(The company is using a fully diluted share base of 24.2 million to calculate
the full year EPS figure and 17 million shares for the fourth quarter)
CCC also supplied the following preliminary guidance for 2005:
- - Revenue growth is expected to be in the low to mid single digit percent
range
- - Earnings per share is anticipated to grow by 85 to 95 percent over 2004.
Please note that this guidance is based on expectations for 2005 earnings
compared to 2004 reported results, which include the impact of the net
charges taken in the second and third quarters, and also reflects the
decrease in the fully diluted share base due to the self-tender offer
- - The company expects to use 17.3 million shares for the fully diluted
earnings per share calculation for 2005
LIQUIDITY AND CAPITAL RESOURCES
During the nine months ended September 30, 2004, net cash provided by
operating activities was $30.4 million, proceeds of $177.5 million were
received from entering into a new debt agreement, proceeds from the sale of
short-term investments were $7.0 million and proceeds received from the exercise
of stock options were $1.6 million. During the third quarter of 2004, the
Company made its scheduled payment of $0.4 million and a voluntary prepayment
of $7.0 million on the long-term debt to bring the principal balance down from
$177.5 million to $170.1 million. We used $210.0 million for the self-tender
offer of 11.2 million shares of common stock, $3.6 million for the payment of
deferred financing costs and $0.9 million for costs related to the self-tender
offer. We also used $4.1 million for the purchase of equipment, software, and
for costs related to consolidate and make improvements to our main office in
Chicago.
Credit Agreement
On August 20, 2004, in conjunction with the self-tender offer, CCC entered
into a new credit agreement (the "Credit Agreement") replacing CCC's former
credit facility. The new agreement is in the form of a term loan ("Term Loan")
for $177.5 million and a revolving loan ("Revolving Loan") for $30.0 million. As
of September 30, 2004 the Company has had no advances under the Revolving Loan.
As compared to the former credit facility, the Credit Agreement provides CCC
with improved terms and additional flexibility. The Credit Agreement contains
covenants that, among other things, restrict CCC's ability to sell or transfer
assets, make certain investments and make capital expenditures in addition to
certain financial covenants. The Credit Agreement is guaranteed by CCC and is
secured by a blanket first priority lien on substantially all of the assets of
CCC and its subsidiaries. CCC is also required to provide the lender with
quarterly and annual financial reports.
The Revolving Loan matures on August 20, 2009 and the Term Loan matures on
August 20, 2010. The quarterly scheduled principal payments on the Term Loan
are approximately $0.4 million through June 30, 2010 with a payment of $166.9
million due at maturity. All advances under the Credit Agreement bear interest,
at CCC's election, at the London Interbank Offered Rate ("LIBOR") plus a
variable spread based on our leverage ratio or the prime rate in effect from
time to time plus a variable spread based on our leverage ratio. CCC pays a
commitment fee of 0.50% on any unused portion of the Revolving Loan.
During the quarter, the weighted average interest rate was 4.6%. CCC made
cash principal and interest payments under the Term Loan of $7.4 million and
$1.0 million, respectively, during the quarter ended September 30, 2004. The
principal payment included a voluntary prepayment of $7.0 million and a
scheduled payment of $0.4 million.
Self-Tender
During the third quarter of 2004, the Company's Board of Directors
authorized a self-tender offer to purchase up to $210.0 million of its common
stock at a price of $18.75 per share. The tender was fully subscribed and 11.2
million shares were purchased. The purchase was made through a fixed price
tender offer in which all of CCC's stockholders, vested option holders and
warrant holders, including employee benefit plans, were given the opportunity to
sell a portion of their shares at a price of $18.75 per share, without incurring
any brokerage fees or commissions. This represented a premium of approximately
26% over the closing stock price of $14.90 per share on July 21, 2004, the day
before the tender was announced. Since the number of shares tendered was
greater than 11,200,000, purchases were made based on a proration factor of
44.1049 percent. The self-tender offer was funded by a Term Loan facility of
$177.5 million and $32.5 million of cash on hand. The shares that were
purchased were retired.
Liquidity Requirements
Our principal liquidity requirements consist of our operating activities,
including product development, our investments in capital equipment and other
business development activities. We have the ability to operate with a working
capital deficit, as we receive substantial payments from our customers for our
services in advance of recognizing the revenues and the costs incurred to
provide such services. We invoice each customer one month in advance for the
following month's CCC Pathways' services. As such, we typically receive cash
from our customers prior to recognizing the revenue and incurring the expense
for the services provided. These amounts are reflected as deferred revenue in
the consolidated balance sheet until these amounts are earned and recognized as
revenues.
In addition, management believes that cash flows from operations and our
available Revolving Loan of $30.0 million will be sufficient to meet our
liquidity needs for the foreseeable future. There can be no assurance that we
will be able to satisfy our liquidity needs in the future without engaging in
financing activities beyond those described above. As of September 30, 2004, we
were in compliance with all covenants and have had no advances under the
Revolving Loan.
CONTRACTUAL OBLIGATIONS
The following summarizes our significant contractual obligations and
commitments as of September 30, 2004 (in thousands):
LESS THAN 1-3 4-5 MORE THAN
TOTAL 1 YEAR YEARS YEARS 5 YEARS
------------------------------------------------
Operating lease obligations $ 27,115 2,900 18,358 3,975 1,882
Capital lease obligations . $ - - - - -
Long-term debt obligations. $170,057 444 5,325 3,550 160,738
Purchase obligations. . . . $ - - - - -
Other long-term liabilities $ 2,680 217 1,965 498 -
------------------------------------------------
Total . . . . . . . . . . . $199,852 $3,561 $ 25,648 $ 8,023 $162,620
================================================
CERTAIN RISKS RELATED TO OUR BUSINESS
The additional risk factors identified this quarter should be read in
conjunction with the Company's Annual Report on Form 10-K for the year ended
December 31, 2003 filed with the SEC.
IF WE ARE UNABLE TO GENERATE SUFFICIENT CASH FLOW TO SERVICE OUR INDEBTEDNESS OR
OTHER OBLIGATIONS OR FIND ALTERNATIVE FINANCING SOURCES, OUR BUSINESS MAY BE
ADVERSELY AFFECTED.
Our ability to make payments on our indebtedness and other obligations and
to fund planned expenditures depends on our ability to generate future cash
flow. This, to some extent, is subject to general economic, financial,
competitive, legislative, regulatory and other factors that are beyond our
control. In addition, our ability to borrow funds under our $30.0 million
Revolving Loan, depends on our ability to satisfy various covenants. As of
September 30, 2004, we were in compliance with all covenants.
We cannot assure you that our business will generate cash flow from
operations or that future borrowings will be available to us under the Credit
Agreement or otherwise. In addition, we can give no assurances as to whether we
will be able to obtain additional financing from other sources. Inability to
obtain financing from alternative sources may have an adverse effect on our
financial position, results of operations and cash flow.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest Rate Risk
As a result of borrowing made under the Term Loan, the Company is now
exposed to the risk that its earnings and cash flows could be adversely impacted
by fluctuations in interest rates. Our long-term debt bears interest at floating
interest rates. Since the interest rates of this instrument is variable, a
hypothetical 10% increase or decrease in interest rates would result in
corresponding increase or decrease in annual interest expense of $0.8 million.
We currently do not use any derivative instruments to hedge our interest rate
risk, however, the Company is currently considering several different
alternatives.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of disclosure controls and procedures
The Company maintains disclosure controls and procedures that are designed
to ensure that information required to be disclosed in the Company's reports
under the Securities Exchange Act of 1934, as amended ( "Exchange Act"), is
recorded, processed, summarized and reported within the time periods specified
in the SEC's rules and forms, and that such information is accumulated and
communicated to the Company's management, including its Chief Executive Officer
and Chief Financial Officer, as appropriate, to allow timely decisions regarding
required disclosure. In designing and evaluating the disclosure controls and
procedures, management recognized that any controls and procedures, no matter
how well designed and operated, can provide only reasonable assurance of
achieving the desired control objectives, and management necessarily was
required to apply its judgment in evaluating the cost-benefit relationship of
possible controls and procedures. Also, the Company has an investment in an
unconsolidated entity. As the Company does not control or manage this entity,
its disclosure controls and procedures with respect to such entity are
necessarily substantially more limited than those it maintains with respect to
its consolidated subsidiaries.
As of September 30, 2004, the end of the quarter covered by this report,
the Company carried out an evaluation, under the supervision and with the
participation of the Company's management, including the Company's Chief
Executive Officer and the Company's Chief Financial Officer, of the
effectiveness of the design and operation of the Company's disclosure controls
and procedures. Based on the foregoing, the Company's Chief Executive Officer
and Chief Financial Officer concluded that the Company's disclosure controls and
procedures were effective at the reasonable assurance level.
Changes in internal controls
There has been no change in the Company's internal controls over financial
reporting during the Company's most recent fiscal quarter that has materially
affected, or is reasonably likely to materially affect, the Company's internal
controls over financial reporting.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The information provided in Note 12 to the financial statements contained
in Part I of this Form 10-Q is incorporated herein by reference.
On July 2, 2004, Mitchell International Inc. filed a Motion for Summary
Judgment in the patent infringement lawsuit brought by the Company in the United
States District Court for the Northern District of Illinois (Eastern Division).
CCC filed its response to Mitchell's Motion for Summary Judgment on August 6,
2004, and Mitchell filed a reply to CCC's response on August 20, 2004. The
Court has not yet issued a ruling on Mitchell's motion.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Issuer Purchases of Equity Securities
(a) (b) (c) (d)
Total number Average price Total number of Maximum number (or
Of shares (or paid per shares (or units) approximate dollar value)
Units) purchased share purchased as part of of shares (or units) that
(or unit) publicly announced may yet be purchased
plans or programs under the plans or
programs
7/1/04 - 7/31/04
8/1/04 - 8/31/04
9/1/04 - 9/30/04 11,200,000 $18.75 11,200,000 0
Total 11,200,000* $18.75 11,200,000* 0
* On July 22, 2004, the Company's Board of Directors announced a
self-tender offer to repurchase up to $210 million of its common stock at a
price of $18.75 per share. The tender offer expired on August 30, 2004. The
tender was fully subscribed and 11.2 million shares were repurchased. The
repurchase was made through a fixed price tender offer in which all of CCC's
stockholders, vested option holders and warrant holders, including employee
benefit plans, were given the opportunity to sell a portion of their shares at a
price of $18.75 per share, without incurring any brokerage fees or commissions.
This represented a premium of approximately 26% over the closing stock price of
$14.90 per share on July 21, 2004, the day before the tender was announced.
Since the number of shares tendered was greater than 11,200,000, purchases were
made based on a proration factor of 44.1049 percent. The self-tender offer was
funded by a term loan facility of $177.5 million and the Company's excess cash
on hand.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
10.1 Credit Agreement dated August 20, 2004 among the Company and
Credit Suisse First Boston
10.2 Guarantee and Collateral Agreement dated August 20, 2004 among
the Company and Credit Suisse First Boston
31.1 Rule 13a-14(a) Certification of Chief Executive Officer
31.2 Rule 13a-14(a) Certification of Chief Financial Officer
32.1 Section 1350 Certification of Chief Executive Officer and
Chief Financial Officer
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: November 1, 2004 CCC Information Services Group Inc.
By: /s/ Githesh Ramamurthy
----------------------
Name: Githesh Ramamurthy
Title: Chairman and
Chief Executive Officer
By: /s/ David L. Harbert
---------------------
Name: David L. Harbert
Title: Senior Vice President
and Chief Financial Officer
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION
10.1. . . . Credit Agreement dated August 20, 2004 among the Company and Credit
Suisse First Boston
10.2. . . . Guarantee and Collateral Agreement dated August 20, 2004 among the
Company and Credit Suisse First Boston
31.1. . . . Rule 13a-14(a) Certification of Chief Executive Officer
31.2. . . . Rule 13a-14(a) Certification of Chief Financial Officer
32.1. . . . Section 1350 Certification of Chief Executive Officer and Chief Financial Officer